1. Professional Skepticism
Richard Fleck, IESBA Deputy Chair & Working Group Chair
IESBA Meeting
New York, USA
September 17-20, 2018

2. Objective
Report on recent activities including report-back from CAG
Receive highlights of comments to CP and from RTs
Discuss WG’s assessments
Discuss project proposal and timeline

3. Activities Since June 2018 IESBA Meeting
Global roundtables
Washington DC and Paris (June)
Tokyo and Melbourne (July)
Participation at each roundtable largely the same as for NAS
Observers from IAASB (Washington, Paris and Tokyo) and IAESB (Washington and Tokyo) from coordination standpoint
Overview of participation by stakeholder group: Appendix B, Agenda Item E-1
Consultation paper basis for breakout discussions

4. Activities Since June 2018 IESBA Meeting
Received and reviewed comments to consultation paper Professional Skepticism – Meeting Public Expectations released May 2018
Updated IFAC SMP Committee in June 2018
Updated IESBA CAG last week and received input on WG assessment and draft project proposal

5. Report-Back from September 2018 CAG Meeting
General support for the WG’s assessment and project proposal
The PIOB recognized the importance of this work stream as there is huge public interest
WG Chair clarified the overall objective and scope of the project and its historical connection with “professional skepticism” in the auditing standards
Focus needs to be on changing mindset and behavior; recognized also the need for education and firm/organization role in setting right culture
Outputs of the WG should include non-authoritative guidance material in addition to standard enhancement

6. Report-Back from September 2018 CAG Meeting
Suggestion to review other jurisdictions’ use of similar oath/affirmation
Need to coordinate with IAASB and IAESB
Suggestions that the new proposed title of the project to include “mindset”

7. Comments from IFAC SMPC
Generally supportive of the project proposal
Other comments/suggestions
Comments from the roundtables are similar to its views
Close coordination with IAASB is warranted
Be mindful of scope creep
Project, as it progresses, may give rise to impact/implications that are specific to SMPs and SMEs

8. About Roundtables ½ day NAS session
Introduction
Scene setting
Breakout Sessions
Plenary report-back
Thanks to presenters, rapporteurs and IESBA members, TAs and Staff who supported RTs
APESB and XRB Staff for supporting the Australia RT

9. Overview of RT Participants
Washington DC
Paris
Tokyo
Melbourne
Total
Investors, user advocates and regulators 5 3 4 17
Public sector organizations 1 -
TCWG and preparers 11
Firms, including SMPC representatives 13 8 16 48
NSS and IFAC member bodies 2 10 38
Academics
Others, including IAASB and IAESB representatives 14
Observers - PIOB, CAG and regulators 36 37 34 45
152

10. Roundtables in Pictures

11. Overview of Responses to Consultation Paper
Category of Respondents #
Regulators and public authorities 5
National standard setters 3
IFAC member bodies 26
Firms 10
Academics and other professional organizations 15
Individuals and others
Total 62

12. Key Themes from CP Responses and Roundtables
Broad support for initiative and direction of travel
Reserve term “professional skepticism” for audit and assurance context
Mixed support for articulation of public expectation of PAs
Some concerns about increasing expectations gap
General agreement on behavioral characteristics identified in CP
Widespread view that FPs provide sound foundation for such behavioral characteristics
Equally widespread support to develop application material to promote FPs

13. Key Themes from CP Responses and Roundtables
Strong encouragement to focus on desired outcomes vs. new term
Some suggestions to go with “baseline” mindset for all PAs, with “baseline+” for auditors and assurance practitioners
Mixed views on whether to promote concept of scalability
General support in roundtables for overarching statement of purpose
Support for new provisions addressing bias and other impediments
Acknowledgement that education and training essential
Support for continued collaboration with IAASB and IAESB

14. Responses to Specific CP Questions
General support for proposition that the public expects information with which a PA is associated to be capable of being relied upon for the intended use
But some disagreement
Public expectation is unreasonable
Proposition should be redrafted for greater clarity

15. Responses to Specific CP Questions
General support for behavior articulated in paragraph 10 of CP
PAs should:
Approach professional activities with an impartial and diligent mindset; and
Apply that mindset, together with relevant professional expertise, to evaluation of information with which they are associated.
Some suggestions to improve articulation
Incorporate additional concepts such as “questioning mindset”, “public interest”?
Possible drafting improvements?
Some discussion re use of word “impartial” – how does this relate to PA’s “allegiance” to client or employer?

16. Responses to Specific CP Questions
General agreement that behavior described in paragraph 10 of CP should be expected of all PAs
Mixed views on introducing concept of scalability
Some recognition that nature and extent of PA’s actions will depend on range of factors
But also concerns that scalability could be used by PA to justify “softer” response
Also a view that scalability should be used to establish what could reasonably be expected of a PA – and thus counter unreasonable public expectations
A view that public interest served if all in financial reporting ecosystem were to exhibit behavior in paragraph 10 of CP

17. Responses to Specific CP Questions
Q4: Are FPs and related application material sufficient to support behaviors associated with exercise of appropriate “professional skepticism?”
Diverse views
Proper compliance with FPs should result in behavior described in paragraph 10
If perception is this behavior not being achieved, FPs are not fulfilling intended purpose
Unlikely that adding more material to the Code will make a significant difference
Any changes to the Code will not be effective without appropriate education – support and involvement of IAESB needed

18. Overarching Statement of Purpose
Clear encouragement at all 4 roundtables to explore merit of an overarching statement of purpose
Could be a “mission statement” or “professional oath” that all PAs would be expected to observe
Would sit at beginning of the Code
Supporting application material in sections setting out FPs and conceptual framework, and other appropriate sections of the Code
Necessity of some form of external procedure to give effect to it?

19. Matters for IESBA Consideration
Views/reactions to key themes from CP responses and roundtable feedback?
Views/reactions to responses to Q1 – Q4?
Views on merit of overarching statement of purpose?

20. Professional Skepticism Consultation Paper
Recap of Options
PS as currently defined in auditing standards
PS re-defined
Develop another term and definition
Enhance guidance in the Code
Address role of bias, pressure and other impediments
Choosing Options 1, 2 or 3 would not preclude also doing Options 4 and/or 5

21. Responses to Specific CP Questions
Question 5 re Option 1
Virtually no support to require PAs to exercise PS as defined in ISAs
IAASB definition inappropriate for professional activities other than audit and assurance
Use in non-audit and non-assurance context could dilute its importance in audit and assurance context
PS is term of art in audit and assurance standards

22. Responses to Specific CP Questions
Question 6 re Option 2
Few support for using “professional skepticism” but redefined
Same concerns as for Option 1, but also:
Substantial risk of confusion with PS used in audit and assurance context
PS is not a generic term that can simply be rebadged

23. Responses to Specific CP Questions
Question 7 re Option 3
Views very diverse
Yes to a new term and definition, with supporting A/M – but beware translation pitfalls
Further develop material relating to FPs and conceptual framework, possibly with a new term as an additional element of FPs
Focus on additional application material for FPs and conceptual framework only
New term/definition will not move needle in terms of behavioral change
Focus instead on actions and behaviors needed to meet user expectations
Suggestion to elaborate at front of the Code on core values and behavioral characteristics expected of all PAs

24. Responses to Specific CP Questions
Question 8 re Option 4
Broad agreement that appropriate A/M needed to support any actions taken in the Code to respond to stakeholder concerns
Strong support for A/M to:
“Bring to life” FPs
Explain how they apply to PAs in different roles and circumstances
Encouragement for IESBA to explore supporting off-Code guidance
Case studies, practice notes, FAQs, etc

25. Question 9 – Implications of Options 1-3 for IAASB
Responses to Specific CP Questions
Question 9 – Implications of Options 1-3 for IAASB
Unequivocal feedback that Options 1 & 2 would undermine role and importance of PS in audit and assurance
Respondents and roundtable participants ambivalent about impact of Option 3 – would depend on precise term and definition
No significant concerns about developing A/M under Options 4 & 5

26. Responses to Specific CP Questions
Question 10 re Option 5
Clear support for new material to address bias and other impediments to proper exercise of professional judgment

27. Working Group Assessments and Proposals
PS has become generic term used by stakeholders to encapsulate behavioral characteristics expected of all PAs
Real exhortation is for PAs to fulfill their duty to the public by consistently meeting the responsibilities of their role and actively demonstrating behavioral characteristics in CP
WG recommendations encapsulated in project proposal

28. Comments from SSBs and IFAC Teams
Input sought from SSB and IFAC staff on the project proposal:
IFAC Compliance Advisory Panel and Professional Accountancy Organization Development Committee
Transactional Auditors Committee, SMP Committee, PAIB Committee
SSBs (IAASB, IAESB, IPSASB)
General support from staff
On-going SSB coordination and stakeholders management to discuss issues relevant to their constituents and work

29. Project Proposal New project title proposed:
Professional Accountants – Setting Expectations
Develop new material for the Code
Purpose and role of PA, and behavioral characteristics expected
Explain linkage between (a) purpose, role and behavioral characteristics, and (2) FPs and conceptual framework
Promote PA's role and behavioral characteristics throughout the Code
Address bias and other impediments in a robust way

30. Project Proposal
Consider explaining upfront in the Code to whom it applies and importance of firms promoting compliance with the Code in the firms
Explore feasibility of developing overarching statement of purpose at front of the Code
Coordinate with IAASB and IAESB appropriately
Consider whether and, if so, how to develop material that ensures that expectations of PAs should be seen in context
E.g. relevance of PA’s role and level of experience; degree of risk or judgment in PA’s assessments

31. Project Proposal
WG considered, but did not reach conclusion yet, on whether to:
Go with concept of core values and behavioral characteristics, and how they would relate to the FPs; or
Focus on what it means to be a PA, and how that purpose and role relates to the FPs; or
Pursue both approaches

32. Matters for IESBA Consideration
Views/reactions to respondents’ and roundtable participants’ feedback on Q5-Q10?
Views/reactions to WG assessments?
Views on project proposal, including proposed new title for project?
Views on whether to go with core values and behavioral characteristics or purpose and role of PA or both?

33. Next Steps Timing Action Sept 2018
Full IESBA review of roundtable and CP feedback; approval of project proposal
Dec 2018
IESBA consideration of issues
Mar 2019
Discussion with CAG; IESBA first read
May/Jun 2019
Discussion with NSS; IESBA second read
Sep 2019
Discussion with CAG and IESBA approval of Exposure Draft

34. The Ethics Board